The Four Percent Solution to the Deficit Impasse

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Whether the current budget summit yields an agreement on the
federal budget deficit or not, the negotiations graphically
demonstrate that the federal government's budget process has broken
down completely. Congress currently is set to spend the $79 billio
n it will receive next year in new revenues - and more - rather
than using these funds to reduce the budget deficit. Indeed, over
the last decade, every dollar in new revenues has been accompanied
by more than a dollar of new spend- ing. And the budget sum m it,
which was meant to bring congressional and Bush mini leaders
together behind dosed doors to work out an agreement to cut the
deficit, has yielded almost nothing but calls for higher taxes. Now
the economy is showing disturbing signs of a possible rece s -
sion, due in part to the spectacle of a government unable to
control its spending but eager to raise taxies. Ritther than taking
more money out of productive enterprises and the pockets of
American. con- sumers, which could guarantee a recession, many p o
licy makers are rallying around a proposal that rejects higher
taxes and instead reduces the budget deficit by limiting total
annual spending in- creases to 4 percent. With federal revenues
already projected to climb by $79 billion next year, and by $373
billion over the next five years, this "Four Percent Solution"
would reduce the budget deficit to only $33 billion by 1995, and
produce a balanced budget soon after (see table).

And perhaps mom important, by precluding how Uw4 the Four
Percent Solution will lem more resources in the produc tive private
sector Of the economy, makin a recession less likely. Yet this, or
any other budget proposal, stflfwffi fail unless there are,
stronger - rcement TnWhnni to prevent Congress from violating
spending limits - as it. has done routinely. The Four Percent
Solution thus should include tough major budget process reforms. in
particular, Congress should: 1) Establish Gramm-Rudman Outlay
Targets. Under the Gramm-Rudman Deficit Reduction Act, spending
Utoinatically is cut across the board, or "sequestere d ," if the
projected deficit ex- cce4h the Gramm-Rudman target deficit.
Lawmakers, however, can evade the laws intent simply by itb -
OvCr-cstirnating projected revenues, thereby permitting even larger
spending increases. Once c comes apparent that the rev e nue
projections were maccurate, the sequester has already passed.
Establishing outlay or spending targets should eliminate this
loophole. Under this approach, the current deficit targets would be
augmented by Outlay targets. Whenever projected spending in any
fiscal year was above the target level permitted in the law,
sequestration would be triggered to bring outlays back down to the
legally required level. 2) Create a Second, Mid-Year Sequester.
Even with outlay targets, however, politicians still would h ave an
incentive to underestimate future spending in order to make program
expansions and new spending legally possible. Congress could also
continue its practice of waiting until after the October 15
sequester deadline passes to enact expensive spending b ills. These
loopholes could in large part be closed by creating a second
sequester in the middle of the fiscal year. If a mid-year estimate
showed that spending was exceeding the new outlay target, auto-
matic cuts would reduce spending by the necessary a m otuit. Such-a
reform would give Congress less leeway to exceed its own targets.
3) Abolish Cunent So-vices Budgeting. Much of the public confusion
surrounding the entire budget debate is caused by Congress's
bizarre definition of a budget "cut" - legislat i ng a reduction in
a projected increase. Thus according to Congress's version of a
cut, ff a businessman raised his prices 15 percent instead of the
25 percent he had intended, that would be a price cut of 10
percent. Ibis phony accounting system, known as the "current
services budget," distorts honest debate and builds political
pressure for higher spending. Other proposals before Congress would
further tighten the budget process. Among them: "pay-as- you-go
budgeting," which would require new spending inc r eases to be
offset by reductions else- where in the budget; super-majority
votes to raise taxes or violate Gramm-Rudman targets; a line- item
veto; and a constitutional amendment to limit taxes and maintain a
balanced budget. After tightening the Gramm-Ru d man law, Congress
should give urgent attention to such proposals. The Four Percent
Solution, enforced by budget process reforms, would help reignite
strong economic growth by bringin the stubborn budget deficit
finally under control. Spending control is t h e tool to curb the
deficit. Tax increases are not. Tax increases approved -by budget
summits were tried in 1982, 1984, 1987, and 1989. In each case, the
budget deficit increased the following year. Tax revenues now
consume almost 20 percent of America's g r oss national product
(GNP) - a near- record high for peacetime. Ominously, the only two
times outside of World War II that tax collec- tions have exceeded
20 percent of GNP, in 1969 and 1981, the economy fell into a
recession the fol- lowing yea. The Four Percent Solution, backed up
with reforms to tighten the budget process, would avoid the
recession tripwire, allowing Americans to look forward to declining
federal deficits and robust ecoriontic growth. Daniel J. Mitchell
John M. Olin Fellow